The final step of babies is to build wealth and give. In step 1 Dave Ramsey teaches to build up a small emergency fund, in step 2 to use a debt snowball to pay off debt, step 3 is to get 3-6 months of expenses saved up and then steps 4-6 are the next phase in which important financial priorities are set. Those priorities include 15% invested for retirement, save for kids college if desired, and pay off the mortgage. Those steps can take quite a while, as you can imagine. Dave Ramsey states that those who follow his steps, though, will have their house paid off in about 7 years on average. I think he is honest about that, but I also think his numbers are probably skewed by some of the people who either downsized considerably in their house, or paid off their house by simply selling it and renting.
That is editorializing, though, and how long it takes people to complete step 6 is unimportant to discussing the next step. Step 7 is to simply build wealth and give. His audience, having already put 3-6 months of expenses in the bank, now being completely without debt, actually has greater than 12 months of expenses saved up now that they don’t have a mortgage. They have already made the routine of budgeting to set aside 15% into investments and that will continue as long as they have an income. If they have kids, college is already paid for or the savings are completed to have it paid for.
Now they get to have a LOT of fun.
This special group can put most of their income into investments at this point. They can afford fees to shuffle their investments into tax sheltered vehicles, to max out tax shelters, and can simply invest. This group is the group that truly starts to give as well. Seemingly, they grow tired of just accumulating money and start to help other people. It sounds suspiciously like they have too much.
Greedy? No. We have forgotten how much these folks sacrificed to get where they are. Those that give less and invest are also providing a critical function to the economy in putting money back into the market for use. The risk they assume by investing is that the market will provide a return. Historically it is sound, but recessions and depressions do happen. For businesses to make use of the available capital, they have to borrow the money and promise to pay interest for the immediate value.
So they aren’t greedy. They are free, though, and the sentiment in our culture that believes they are greedy, in my opinion, is based solely in envy. I can empathize. We shouldn’t feel that way though.
This group sacrificed and scraped and scrapped, while making deliberate choices and staying true to their plan to get where they are. The beauty of all of this is that they got there fast, and if you implement half of what they do, you can likely get there as well, albeit more slowly.
The very basics of what Dave Ramsey teaches are true for everyone. The priority is your 4 walls of protection, which he outlines as Food, Utilities, Shelter and Transportation. You can include clothing in that, but only what is necessary. When taking care of the 4 walls, that doesn’t include a new sport jacket or pair of expensive jeans to look nice. If you take care of those first, and then cut expenses on everything beyond that, sometimes even finding ways to cut expenses on the things you need to take care of the 4 walls, and you will spend less than you make, you can make progress. You can cut expenses on practically everything with effort.
We already addressed how to cut housing expenses, with downsizing or even selling and saving up for a down payment by renting or moving in with relatives. Food can be made at home and there are less expensive options available that you can be creative with. Utilities are about not wasting water, turning off lights when they aren’t being used, and other usually minor adjustments…but sometimes downsizing the home saves ample money in this as well. Transportation is about buying something inexpensive that works. You don’t need the nice vehicle to impress the ladies, or your work buddies, but something that functions and gets you where you need to go.
Now you are past all of that, though. If you are in step 7, you can probably afford to buy a house in cash after only 5-7 years of deliberate saving. It is insane when you think about the liberty these folks have gained by true financial freedom.
Speaking about it now, I’m not sure why I changed my mind. My wife and I made it all the way to step 7, but immediately jumped back into debt to start another system. I still believe it was the right choice, mathematically, but for a few months, I truly felt free.
If you just want that feeling, then don’t read any more from me on budgeting. Get Dave Ramsey’s book, The Total Money Makeover, or purchase Financial Peace University, through my provided link in this post, of course, and start getting your gazelle intensity to get away from debt. I promise you won’t regret it. As Dave says, if you regret it, you can always go and get a mortgage and go right back into debt. Nobody will stop you.
Now, if you plan to start your own business or you want flexibility in your investments, with guaranteed income and the opportunity to never have to deal with a bank again while still having quick access to money when you need it, then I want you to keep reading.
I don’t want this to sound too good to be true. It is difficult and there is an investment of time and money to get the system to work, but there is a way to essentially replace the banking function in your own life. Rather than trying to pay the bank for the right to access money to buy a house or to grow a business, you can have access to funds that grow at a guaranteed 2-3% interest. To do it right, you have to think like a banker, though. You have to be honest with yourself and your budget. If you figured out Dave Ramsey’s system and know how to implement it, you are going to do well. I suggest reading these books and we will discuss in further detail in future posts.
Becoming Your Own Banker should be mandatory reading for anyone looking into this next step. You have to learn how to do it right, so you can maximize the effects.
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